Abdul rahman the art of islamic banking and finance (2010)

The Art of
Islamic Banking
and Finance


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The Art of
Islamic Banking
and Finance
Tools and Techniques for
Community-Based Banking

YAHIA ABDUL-RAHMAN

John Wiley & Sons, Inc.


Copyright # 2010 by Yahia Abdul-Rahman. All rights reserved.

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.
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Library of Congress Cataloging-in-Publication Data:
Abdul-Rahman, Yahia, 1944The art of Islamic finance and banking : tools and techniques for community-based banking /
Yahia Abdul-Rahman.
p. cm. – (Wiley finance; 504)
Includes index.
ISBN 978-0-470-44993-6 (hardback)
1. Banks and banking–Islamic countries. 2. Banks and banking–Religious aspects–Islam.
3. Finance–Islamic countries. 4. Finance–Religious aspects–Islam. I. Title.
HG3368.A6A244 2010
332.10917’67–dc22
2009028344
Printed in the United States of America

10 9 8 7 6 5 4 3 2 1


Contents

Preface
Acknowledgments
Chapter 1:
Introduction
Chapter 2:
The Faith-Based Judeo-Christian-Islamic Foundation of the Prohibition
of Interest and the RF (Riba-Free) Banking System
An Introduction to the Judeo-Christian-Islamic Foundations
of Faith
The Book
The People of the Faith
Loans
Usury/Interest
The Judaic Position on the Charging of Ribit (Interest):
Money, Lending, and Interest in the Torah and the
Jewish Tradition
Loans to the Poor
Lending to Non-Jews with Interest
Business Financing
The Charging of Ribit (Interest) in the Roman Catholic
Tradition: Then and Now
Lending to the Poor
Position of the Contemporary Roman Catholic Church
on Allowing the Charging of Interest
The Charging of Ribit (Interest) in the Tradition and Teachings

of the Evangelical Christian Church
Lending to the Poor
Lending to the Enemy

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Business Financing and Relaxation of the Rules of
Prohibiting the Charge of Interest
The Prohibition of Charging of Ribit/Riba (Interest/Usury)
in Islam
The Development of the Universal Riba-Free System
in Islam
The Concept of God Owning Everything
Developing the Institution of Giving (Zakah) as a
Required Islamic Ritual (Like Prayers)
Behavioral Guidelines and the Discipline of Giving
Business Finance
Types of Riba
Shari’aa Prohibits Deceptive and Speculative Activities
in Business Transactions (Gharar)

Chapter 3: The Rule of Commodity Indexation and
the Principle of Marking to the Market
Development of the Mark-to-the-Market Rule
Riba-Free Business Transaction Models
Cost-Plus (Murabaha)
Leasing (Ijara)
Joint Venture (Musharaka) Direct Investment/Equity
Ownership or Partnership
Money Management (Mudaraba)
Financing Future Production (Ba’i ul Salam)

Chapter 4: Shari’aa: Shari’aa Boards in Islamic Banks: An Overview
and a Vision for the Future

The Law: Shari’aa
Sources of Shari’aa
Application of Shari’aa
The Shari’aa Board in an Islamic Bank or Finance
Company
The Role of the Shari’aa Board
The Duties of the Shari’aa Board
Approaches Used to Appoint Shari’aa Boards
Concerns of Western Central Bankers and Bank
Regulators Regarding Shari’aa Boards
The Development of Shari’aa Scholars and Shari’aa Compliance
Committees for Riba-Free Banks and Finance Institutions
in the 21st Century
The Central Bank and the Regulatory Shari’aa Compliance
Committee

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Contents

Chapter 5: Money and Its Creation: The Federal Reserve
System (Central Banks), Interest Rates, and Commodity Indexation
Those Who ‘‘Make’’ Money and Others Who ‘‘Earn’’ Money
What Is Money?
The History of Money
Fiat (Paper) Money
American Currency Before the Federal Reserve System
The Federal Reserve Board of the United States of America
Function of the Federal Reserve

Structure of the Federal Reserve Board (America’s
Central Bank)
Who Owns the Federal Reserve Bank?
Credit Creation in the Modern Banking System
The Dollar Made As Gold! What a Wonderful Place to Be!
A Brief History of the Bretton Woods Agreement, Which
Changed the World of Money
The Fed Fund Interest Rates Setting Regime
Fiat (Paper) Money and the Cyclical Nature of the
Fiat Money Economy
The Prohibition of Riba/Ribit: Rulings on Riba in Fiqh,
the Science of Shari’aa
Reason for Prohibition
Application of Shari’aa using the Commodity
Indexation Rule
Homes in America
Price of Coal
Price of Crude Oil
Price of Natural Gas
Price of Rice
Gold: That Amazing Metal
Gold Reserves in the World
The History of Gold Markets and Prices
Gold Price Fixing
Marking the Investment to the Market

Chapter 6: Civility and Social Responsibility of the
Riba-Free Banking System
The Judeo-Christian-Islamic Values: Civility, Morality,
and Social Responsibility

The Vision of an Ideal Faith-Based Judeo-Christian-Islamic
Society
New Trends that Captured the Imagination of the Pagans of
the Arabian Peninsula

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Elements of the Riba-Free Economic System
Production
Distribution
Consumption
The Riba-Free Judeo-Christian-Islamic System and Business
Ethics
The Market System
Management Ethics
Justice and Fairness on Both Sides: The Bank and the
Customer
Banking and Investment Banking
Values and Business Ethics of the RF Banker
Professionalism
Concentration
Consistency

Commitment
The Ten Golden Covenants of the RF Bank
Where Do We Start and How Do We Realize the Dream?

Chapter 7: The Conventional Riba-Based Banking System
The Banking System of the United States
Types of Banking Services in the United States
National Banks
State Banks
Credit Unions
Investment Banks
Licensing a Commercial Bank in the United States
Government Supervision of the Bank
The Office of the Comptroller of the Currency
Insurance of Bank Deposits by the Federal Deposit
Insurance Corporation (FDIC)
United States Banking Regulations
Consumer Compliance Management
Board of Directors and Management Supervision
and Administration
Compliance Program
Compliance Committee
Internal Controls
Summary of Federal Banking Regulations in the
United States
Regulation B: Equal Credit Opportunity
Regulation C: Home Mortgage Disclosure Act (HMDA)

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Regulation Q: Prohibition Against Payment of Interest on
Certain Deposit Account Types
Regulation D: Reserve Requirements for Depository
Institutions (Banks)
Regulation O: Loans to Bank Insiders
Regulations P and S
Regulation Z: Truth in Lending Act
Regulation BB: Community Reinvestment Act (CRA)
Regulation DD: Truth in Savings Act
Fair Credit Reporting Act
Anti-Money-Laundering Program
Bank Examination for Safety and Soundness by Bank
Regulators
Bankruptcy Laws

Chapter 8: What Is the Difference? Comparing Riba-Free Banking
and Conventional Riba-Based Banking
The RF Banking Brand: History, Development, and Stages
of Growth
An Overview of RF Banking

Misnomers in RF Banking
What Is RF (Islamic) Banking?
What Is the Difference Between Riba-Based Conventional
Banking and RF (Islamic) Banking?

Chapter 9: Islamic Banking in the 20th Century
Islamic Banking Models
The Cost-Plus (Murabaha) Model
Financial Engineering and Shari’aa
The Lease-to-Own Models (Al Ijarah Wal Iqtina or
Al Ijarah Wal Tamaluk)
The Al Baraka Bank of London Shari’aa-Compliant
Model
The South Asian Diminishing Musharaka Shari’aaCompliant Model
Court Challenges to the Shari’aa-Compliant ‘‘Contract Fitting’’
Islamic Finance Approach
Cases Litigated in the U.K. Courts
Resolutions Taken By ‘‘Islamic’’ Banks to Avoid
Lengthy Trials
Conclusion

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CONTENTS

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Chapter 10: RF Banking Model for the 21st Century: Developing the
Shari’aa-Based Finance Model

The Puzzle and the Challenge of Developing RF Banking and

Financing
Legal and Financial Categories
Participants in the Development of Modern RF Banking
RF Banking Consumers and Potential Users
Shari’aa and the Laws of the Land
Developing the Art of Islamic Banking and Finance
The Approach Used to Develop the Art of Islamic RF
Banking
Major Objections of Shari’aa Scholars to the Conventional
Riba-Based Finance Contract
Building the Shari’aa-Based Finance Model
The Unique Features of the LARIBA Shari’aa-Based
Model
The Stages Used to Implement the Shari’aa-Based
LARIBA Model of Financing
The Results

Chapter 11: Starting an RF Bank in the United States: Acquiring and
Restructuring a Troubled Bank and Operating It Riba-Free
Introduction
Riba-Based Conventional Financing versus RF Financing
Looking for a Suitable Bank to Acquire
Making History: Acquiring the Bank of Whittier, N.A.
Operating the First RF Bank in the United States
Our Strategic Approach to Restructure the Bank of
Whittier
The Bank Restructuring and Workout Plan: Turning the
Bank Around
Specific Action Plan and Steps Taken by Bank Management
Strategies Designed and Steps Implemented by the New

Management
The Staff and Employee Policy: Strategy Used to Build Up
and Train Bank Staff
The New Staff: A Strategy for Defining Whom to Look
for and Where to Search
The Audit Policy: Strategy Used for Auditing Bank Functions
and Operations
Engagement Letter for External Auditors
Audit Response by Management

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Contents

Chapter 12: Operating an RF Bank in the United States
Investing in and Operating a Riba-Free Bank in the
United States
The Added Value of RF Banking
What is RF Banking and Finance?
U.S. Banking Regulations and Bank Regulators
U.S. Securities Laws and Regulations
The Spirit of the Riba-Free and Gharar-Free (Islamic)
Banking and Finance System
Strategies Used to Build a Viable RF Banking System
in the United States
Key Internal Controls at the Bank
Creating True RF Private Bankers and RF Credit Analysts
Recruiting and Interviewing RF Bankers
Community Participation, Networking, and
Customer Service
Training Program at the Bank of Whittier Open University

Reading Discipline
RF Banking Values and Social Responsibility
Introduction to Banking
Character Building: Honesty and Integrity
Know Your Customers, Privacy, Customer Identification
Policies, and Fraud Prevention
Understanding Banking Regulations
Prevention of Money Laundering and Complying
with the Bank Secrecy Act
Special Courses for Credit Department Personnel
The Balance Sheet of the RF Bank
General Concepts
The Need for a Good Detail-Oriented Management
Team at the RF Bank
Restructuring a Riba-Based Bank to Operate as an RF Bank
Evaluation and Review of Existing Services
Deciding on Types of Accounts Offered to Individuals,
Families, and Businesses
Risk Management for an RF Bank

Chapter 13: Case Studies: Developing the RF Banking Investment
Products
The Investment Pyramid
Cash and Cash Equivalents
Short-Term Investments

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RF Bonds: Sukuk (RF Income Instruments that Replace
Riba-Based Bonds)
Investment in Stocks
RF Asset-Backed Bonds (Sukuk)
RF Mortgage-Backed Sukuk Securities
The Development of MUIS Waqf Sukuk: RF
Asset-Based Bonds Used to Unlock the Value of Trusts
RF Stock Market Investments
Guidelines for RF Investing in the Stock Market
Normalization of Various Stock Market Indexes Using
the Commodity Indexation

Chapter 14: Visions for the Future of RF Banking
The 2008 Global Economic and Financial Meltdown
The Mega-Banks and Financial Institutions
The Culture of Renting Money with Ribit/Riba
The Lifestyle of the Judeo-Christian-Islamic Value System
Some Advice for the Newcomers to the RF Lifestyle

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Chapter 15: A New Banking Vision for the 21st Century

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Index

382


PREFACE
My Story With Islamic Banking
and Finance in America

I

came to the United States on my own from Egypt to study for my MS and
PhD degrees at the University of Wisconsin, Madison in 1968. I had essentially nothing except my BS degree in Chemical Engineering from Cairo University and a letter from the University of Wisconsin, Madison accepting me
as an International Special Student on a trial basis. I did not have the funds
to pay for tuition nor for accommodations, books, and other expenses. It

was a big challenge for me, but I made it, through hard work, to where I am
today managing a pioneering effort in America to establish what I consider a
revival of the banking system that built America. Using a platform we call
the LARIBA system (www.LARIBA.com), we offer socially responsible,
faith-based, and riba-free banking. Throughout this book, I will abbreviate
it as RF banking.
In 1987, a group of dedicated friends invested $10,000 each to start a
small company we called American Finance House LARIBA. We gathered
$200,000 as the startup capital. To my knowledge, this was the first time
ever a group of Muslims had bonded together to start a joint project
that would eventually become an important force in the American Muslim
community and in many non-Muslim communities. Our goal was to start a
finance company that would operate without the charging of interest and
according to the foundations of Islamic law (Shari’aa). Today, in 2009, and
after 22 years the LARIBA shareholders own LARIBA (www.LARIBA.
com), the oldest Islamic RF finance company in the United States, and the
Bank of Whittier (www.BankOfWhittier.com), a national bank. The LARIBA System (the finance company LARIBA and the Bank of Whittier, NA)
serves all 50 states in America and services a portfolio of riba-free shari’aacompliant financing that is worth approximately $400 million. The portfolio includes home mortgages, automobiles, fast food franchises, medical
doctors’ clinics, dialysis centers, commercial buildings, schools, churches,
and Islamic centers. It was, and continues to be, a wonderful journey.

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PREFACE

This book is a strong effort to introduce this new brand of banking,
which is based on the Judeo-Christian-Islamic value system while upholding

the laws of America.
I must acknowledge that, after traveling the world over and doing business in many nations, I concluded that only in the United States can a new
immigrant realize his/her dreams, even with a new idea that might have
looked unbelievably outrageous at the time. I am deeply indebted to Almighty God, who created the reasons for me to come to America, start a
family, and live here. I am thankful to my fellow Americans of all faiths and
backgrounds for making our country, the United States of America, what it
is. It is unfortunate that America is viewed internationally through the lens
of Hollywood movies and the sometimes controversial aspects of our foreign policy. It is unfortunate that the wonderful average American neighbor,
colleague, farmer, worker, professional, student, and volunteer do not get a
chance to be fully and fairly represented and exposed to the United States
and the rest of the world.
My feeling as a Muslim moving to live in the United States was one of
curiosity. Moving to America changed my social standing and grouping; I
went from a majority Muslim country to being a member of the Muslim
minority in the United States, which was an unknown minority belonging to
an unknown religion at that time. Reflecting on it, I concluded that God in
His infinite wisdom wanted us Muslims in the United States to experience
living as a minority. If we were wise, we, the Muslims, would learn from this
golden opportunity and better understand how to deal with non-Muslim
minorities in the Muslim majority countries. At the same time, we might be
able to further enrich a country that was—after all—built by successive
waves of immigrants, each bringing something new to the broader culture
of the nation. Being a member of the small Muslim minority created an interesting basic feeling, an instinct and need to discover ones’ roots and to
define whom one really is. That was the beginning of our journey, my wife
and I, in the service of Islam in America in the form of serving the Muslim
community and the integration of Islam and the American Muslim community to make them part of the unique American mosaic through interfaith
and civic activities.
My story with Islamic finance began in Dallas, Texas in 1971. I had
completed my PhD in chemical engineering, and my wife had completed her
MS degree in chemical engineering. I got a job at the Production Research

Center of Atlantic Richfield Co. (ARCO, which is now owned by British
Petroleum). At the time, ARCO had just discovered oil in Alaska and was
expanding its research on how to produce that oil and transport it south to
the mainland under the most severe operating conditions. We moved from
Madison, Wisconsin to Dallas, Texas in November 1971. We looked for a


Preface

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masjid (mosque) where we could perform our weekly congregational prayers (jum’aa). We started by looking for people with a Muslim last name. The
most prevalent and easy to find in the phone book was Khan. We called and
we got in touch, but we learned sad news: There were no Friday prayers yet
in the Dallas/Fort Worth area. We started the first-ever Friday prayers in
Dallas, Texas on Friday, November 26, 1971. Only two persons attended
the prayer which was held at a park behind the Southern Methodist University (SMU) campus.
The community grew, and we started collecting donations to build an
Islamic Center of our own, The Islamic Association of North Texas (IANT).
We eventually raised approximately $17,000 in donations, and we found a
home on a nice sized piece of land in the city of Grand Prairie, Texas (between the cities of Dallas and Fort Worth), which was selling for approximately $34,000. A medical doctor friend and a board member, who was
more sophisticated because he knew how to borrow from banks (as he had
financed his clinic and his convertible Mercedes), suggested that we borrow
money from the bank. Members of the community were up in arms because
we were entertaining the thought of dealing with interest, which is prohibited in Islam. When I was asked to give an opinion about the issue, I indicated that I was an engineer and a practicing Muslim who takes interest in
studying the Qur’aan and Islam, but I knew nothing about money, banking,
and finance.
That was the beginning of a journey that gradually took me away from
engineering to banking and finance. It was also an amazing coincidence that
God created another reason for that transformation. In 1972, the Strategic

Planning Group at ARCO was convinced that oil prices would increase
drastically because of an impending supply/demand imbalance. ARCO had
huge reserves of oil shale in Colorado and ‘‘wet’’ coal in Wyoming. It was
decided that the Research Center would start developing new processes for
the production of synthetic oil and gas from shale and coal. I was one of
those assigned to the task. I developed a number of processes that were patented by ARCO. The next step was to study the economic feasibility of
these new processes. To do that, ARCO, in 1974, agreed to help finance my
studies towards an MA degree in International Management and Finance at
the University of Texas, Dallas. There, I chose to study monetary theory, to
understand what money is and how money is created, international monetary theory, financial accounting, credit analysis, and international
economics.
It was also amazing that God created another reason for me to get a
once-in-a-lifetime opportunity to obtain hands-on banking experience. One
day in 1974, during the month of Ramadan, while working in my ARCO
office in Plano, Texas, I received a phone call from a stranger who said that


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he was from Kuwait, that he was one of the Executive Directors of the
World Bank representing Kuwait and that he was given a mandate from his
government to start the Industrial Bank of Kuwait, IBK. When I asked him
how he found me, he said that he was looking for an engineer in the petroleum field, preferably one who understood finance and could speak Arabic.
It happened that two different persons recommended my name. I went to
Washington, DC to interview him and was offered a job on the team that
would start the Industrial Bank of Kuwait. My responsibility was to take
care of financing small- and medium-sized oil-related development projects
and other chemical and petrochemical projects. ARCO management was

elated and encouraged me to go. They granted me a leave of absence, with a
guarantee that my job would be waiting when I was done with the assignment. It was a wonderful experience that introduced me to the process—
and the associated challenges—of starting up a bank. The bank developed
an industrial development plan for Kuwait. We financed projects ranging
from mega-sized petrochemical plants to offshore drilling rigs to projects
that were as small as juice packaging facilities and cookie manufacturing
plants. In 1975, I returned to Dallas, became a United States citizen in
1976, and completed my MA degree, while my wife completed her MS degree in Physics and a PhD in Environmental Engineering.
At the end of 1976, I was invited to join the ARCO Strategic Planning
Group, which took us to ARCO’s Los Angeles headquarters. There, I eventually became the Senior Planning Consultant in charge of projecting oil prices based on studies of energy sources, supply, and demand from oil, gas,
shale, coal, nuclear, and hydro power, both in the United States and overseas. The group made recommendations to ARCO’s management for investing in oil, natural gas, and coal in the United States. This was a wonderful
experience that taught me strategic thinking, integrating the thoughts of
many experts and executives in their own fields, and translating the conclusions to reach specific, well-defined strategic recommendations and decisions. The experience also gave me a chance to deal with many company
executives, leading politicians, and government employees in the field of energy. In 1979, the Islamic Revolution erupted in Iran, and ARCO lost its oil
production and supply from Lavon Island (which is off Iran’s coast). In
1978, during the peak of the oil crisis, ARCO management assigned me the
responsibility of managing the effort to find more than 250,000 barrels of
oil per day to supply the shortfall due to the loss of production from the
Lavon oil fields. This gave me a chance to see the world. I went to Africa,
Asia, and Latin America looking to sign oil supply deals with almost every
country that produces oil. I received an attractive offer to be an Executive
Vice President of an independent refining company in Houston, Texas.


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Later on, I started my first company as an entrepreneur trading in oil and
petroleum products.

In Houston, I was invited to become a founding member of a new bank,
Woodway National Bank (it was acquired by a larger bank later). In 1983,
and during our bank board meetings, we were briefed on delinquencies and
non-performing loans that were given to some of the biggest entrepreneurs,
companies, and executives in Houston. I also noticed a lot of tension in one
of the briefings given by the then-mayor of Houston, Kathy Whitmeyer, and
the city’s financial manager. Business in Houston had slowed drastically due
to the decline in oil prices. Houston was hit as the oil, economic, and real
estate bubble burst. (I saw the scars of this crash every time I visited Houston until the early 2000s, 20 years later.)
I went home to discuss this alarming situation with my wife. We decided to sell our house in the expensive Memorial area of Houston. We
wanted to sell it fast. We asked a well-educated real estate broker (a former
mathematics and statistics high school teacher from Canada) to give us a
good estimate for a price that would help us sell it as soon as possible. He
invited over 100 real estate agents to our house and polled them. Based on
his statistical analysis of the poll, he recommended $595,000, but he hesitated because the house next door was listed for sale at approximately
$895,000. We told him to go ahead. We sold the house within weeks for
$575,000 and moved to a nice apartment close by until our two daughters
finished the school year, at which time we prepared to move back to our
house in the city of Altadena near Los Angeles, California (which we hadn’t
been able to sell because interest rates had risen to nearly 19%). We considered ourselves very lucky, because we were able to sell our house before the
Houston real estate crash, and not being able to sell the California house
meant we had a home waiting for us in California. (The next-door neighbor
was not able to sell his house until he lowered the price from $895,000 to
$300,000.)
Returning home one day in 1984, while still in Houston, I found a telegram from the Industrial Bank of Kuwait; the bank I had helped start
10 years before. In 1983, Kuwait was hit by a devastating stock market
crash because of a nationally practiced pyramid scheme. I went to interview
with the new chairman and received an offer to return to the Industrial Bank
of Kuwait. I took my family back to California, fixed the house, and settled
our children in school. My wife went back to work for CF Braun designing

fertilizer plants and oil refineries before she moved later on to work for
Northrop, the defense contractor. In September 1984, I started working at
the Industrial Bank of Kuwait. As the projects manager, my team responsibilities included


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1. taking care of non-performing assets and recommending a course of
action to work out the loan portfolio,
2. identifying new projects that were needed in the economy to help
growth and to finance them, and
3. training a new generation of young Kuwaitis to take over as the new
industrial bankers in Kuwait.
Because my daughters were in school, my family did not join me this time;
they stayed in the United States. I lived in a half-suite at the Sheraton in
Kuwait. During this time, between 1984 and 1986, I had a chance to see
how a bank loan portfolio can grow in a fictitious boom and how many
took advantage of ‘‘easy’’ credit terms and loose credit standards. I experienced how corruption can change the fiber of a society and how money matters can cause deep feuds between leading families and create irreparable
fractures in a society. I also was close to the raging Iran-Iraq war, and I saw
daily convoys of hundreds of trucks carrying tanks, military supplies, wheat,
and food supplies traveling to Iraq from a Kuwaiti port dedicated to support
the Iraqi war efforts. Before I left Kuwait to go back home in 1986, I told my
Kuwaiti friends, ‘‘Those tanks you are sending to Iraq may come back to
threaten your safety and security.’’ Indeed, in 1990, the late President Saddam Hussein invaded Kuwait, and the U.S. Marines came to the Kuwait
Sheraton! The rest is history.
In 1986, I returned to California and found a job as a financial consultant with Shearson Lehman (later to merge with American Express and subsequently in many other mergers to become Smith Barney/Citigroup). As I
began to work in the financial industry, a dream started forming in my head.
My dream was to start a bank or a financial institution for our community.

During all these years, I had remained in close and continuous touch
with the community by serving with my wife in the Islamic Center of each
city we lived in. My wife and I helped start Sunday schools for the children; I
delivered the Friday sermon (khutbah) and led the congregational prayers. I
also performed and officiated at wedding ceremonies, presided over marriage conflict resolution and family matters, prepared the dead for burial,
and taught in the Sunday program to the youths and adults. I was called
upon to travel around the United States and Canada to help motivate local
Muslim communities to donate generously for the building and financing of
masajid (mosques) and full-time Islamic schools designed along the same
models of Catholic and Jewish schools in the United States, Europe, and the
rest of the world.
When we moved from Dallas to Los Angeles in 1977, I was elected to
the board of directors of the Islamic Center of Southern California. I left the
board when we moved to Houston in 1981. In Houston, my wife and I


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started activating, formalizing, structuring, and institutionalizing the
Islamic Sunday school and helped in the organization and operation of the
Islamic Center there. After moving back from Houston to Los Angeles, I
was again elected to the Board and was given the responsibility of chairman
of the finance committee. There, I applied what I had been learning all these
years. Our team restructured the Center’s finances, started a program for
automatic donations from members’ checking accounts to ensure that the
Center employees’ salaries could be provided on a regular basis, and developed operating policies for the Center. Most important of these policies was
to rely only on donations from the American Muslim community. Our policy
allowed the acceptance of donations from non-community sources and

others from outside the United States, but not from governments. It was difficult in the beginning. However, it has been my experience that when you
put people to the challenge and articulate your goals to them, you will capture their imagination to join you. Then what seems impossible can become
possible. Doing this for all those years gave me the opportunity to understand the community, share its joys and dreams, and feel its pains. It also
gave me a chance to meet the youth and children—the new breed of Americans who are Muslim. I saw the future in them, and I had no doubt that it
was going to be a very bright and promising future.
During my many fundraising trips, and on my way back home, I started
thinking about the future of our community. I asked myself: When were we
going to stop ‘‘begging’’ and start building the financial muscles of our community? How could we develop an Islamic finance solution to help solve the
problem of many Muslim ‘‘puritans,’’ who preferred living in small,
crowded, and shabby apartments rather than commit the grave sin of borrowing money with interest to finance the purchase of a home? How could
we bring these families out of the apartments and into suburban America,
where they could meet new neighbors, live a more comfortable life, and
send their children to wonderful neighborhood schools, integrating them in
America to live a full American life, but without interest? How could we
create a financial institution that would be capable and qualified to gather
the community’s savings and be qualified to invest these savings prudently
back in the community, with qualified, dedicated, and honorable community members who have experience, good ideas, and good projects? If we
could realize this dream, I knew, we could empower the community, help
its growth, and create wealth and economic prosperity and job opportunities for many. The answer to this question was to start a bank or a finance
company. The biggest problem was the challenge of operating that institution without interest.
In 1987, I met a visionary who was busy developing Islamic finance
companies and banks around the world. He was in Los Angeles on vacation,


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and he heard me deliver a Friday sermon (jum’aa khutbah) at the masjid.
We became close friends, and I shared with him my dream of starting Islamic banking services for the community in America. He was another gift

from God, because he encouraged me to proceed. He was also instrumental
in introducing me to his contacts: significant lawyers, bankers, and religious
scholars who specialized in the field of Islamic finance. He also wanted to
start a stock portfolio under my management. He further asked our team to
develop parameters that would qualify a company stock on world stock
markets to meet Islamic finance investment criteria. In cooperation with a
few dedicated and highly qualified Islamic bankers and scholars, we developed these parameters, started the portfolio, and diversified it among different portfolio managers around the world. We reviewed the different screens
used to identify Shari’aa-compliant stocks and the performance of this $250
million portfolio on a quarterly basis. To my knowledge, that was the first
time in history an Islamic stock portfolio was developed and brought to life.
It would be years before the Dow Jones Islamic Index was developed, made
public, and marketed throughout the world.
We started American Finance House LARIBA in 1987. In the beginning
we were not sure if our efforts would be accepted or if they would be misunderstood. We used the name American Finance House: American to acknowledge that our company is American, and Finance House to imply its
nature as an Islamic treasury; in the early history of Islam, the Treasury was
called the House of Assets (Bayt ul Maal). We also added the word LARIBA.
In the beginning, we explained to those who did not know about riba-free
financing that LARIBA stood for Los Angeles Reliable Investment Bankers
Associates. Those who knew about riba-free Islamic financing also understood that in the language of the Qur’aan (Arabic), la means no and riba
means the act of renting money at a price called interest rate (the Old Testament uses the sister word ribit for the same concept). We made it very clear
that we were not out to change, dismantle, or demolish the conventional
banking and finance system in the United States. We simply offered a humble alternative that would serve those ‘‘puritan’’ Muslim Americans who
wanted to live according to their religious beliefs while obeying the laws of
the United States. We articulated this at the outset when we made it clear
that changing U.S. laws was not one of our objectives.
As we developed LARIBA, we wanted to make sure that it would be a
grassroots organization for our community. That meant that we should rely
on our own resources, not go hat-in-hand soliciting capital from the oil-rich
communities in the Gulf. We believed that if we were really serious, we
could entice many of our community members, starting with each one of us

putting our own money where our mouths were. We also wanted to train
members from our community on Islamic banking and finance. We made


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sure that we did not use the American Muslim as a marketing front for the
same conventional finance operations to take advantage of a market niche.
The strict guidelines were severe and challenging. They meant that we
would have a steep uphill battle to develop and achieve what we wanted.
However, we believed that the turtle approach would be much more effective than the jumping frog approach. A turtle goes slowly to its target; and if
a hurdle stands in its way and prevents it from progressing, it takes a side
step and proceeds. Compare this to the frog, which jumps up and down and
back and forth and often ends up where it started. Yes, it took us a long
time, but that time helped us develop a system, learn from our mistakes,
sharpen our models, train a new generation of Americans who believe in
our LARIBA concepts, and prove ourselves to the community at large.
We started LARIBA in 1987 (in the month of Ramadan) out of a box.
We slowly grew it out of the box and moved it to the apartment above the
garage in my house. Then we moved to its current location in Pasadena,
where we expanded three times, ending with almost four times the initial
square footage. We started with one part-time employee and grew to 22 employees. One thing that helped us grow was the Internet. In 1997, LARIBA
was contacted by a young man who was doing his masters degree at USC
(University of Southern California) in computers and Web development. He
needed a $3,000 loan to buy a computer to help him in his studies, but no
one would finance him. We financed him at LARIBA. We asked him to develop the first LARIBA portal, www.AmericanFinance.com, which later
became www.LARIBA.com. The LARIBA site became very popular. From
the time we started keeping track of the number of unique visitors in the

year 2000 through July 2009, the LARIBA site has attracted more than
1 million unique visitors. It became the most information-rich site available
on the subject of riba-free Islamic banking.
In 1994, I authored and self-published my first book: LARIBA Bank—
A Foundation for a United and Prosperous Community. It was a simple
book that summarized what I had learned and read over the years about
Islamic banking, and in it, I also articulated our community dreams. The
demand for the book was great. We printed it twice and distributed more
than 6,500 copies in the United States. A publisher in Malaysia acquired
the printing rights and continues to distribute it on a large scale in Malaysia
and Indonesia. LARIBA became an important household name in the United
States and Asia, as well as the Middle East. The brand name LARIBA is now
considered to be like ‘‘Coca-Cola’’—recognized throughout the world as the
brand of Islamic finance. We were invited to speak at universities such as
Harvard University, the University of Illinois, the University of California at
Los Angeles (UCLA), Claremont Graduate College and many others, in addition to Islamic centers, churches, and synagogues all over the United


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States and Canada. In addition, we were invited to present at international
conferences in Malaysia, Bahrain, Brunei, Saudi Arabia, Kuwait, Singapore,
Canada, England, Turkey, South Africa, and Egypt. The media began taking notice. ABC Nightly News (with Peter Jennings) had a segment on LARIBA, as did the Voice of America, Malaysian television, National Public
Radio (NPR), and American Public Media’s Marketplace. The Los Angeles
Times had a front-page article on LARIBA, with a full-page inside report.
Since that time, we have been reported about in USA Today, The Dallas
Morning News, The Wall Street Journal, The Washington Post, The Houston Chronicle, The Chicago Tribune, and The Detroit Free Press, to mention a few.
One day, we received a phone call from the U.S. State Department to

thank us at LARIBA. They explained that when they had published an article about LARIBA in their newsletter to the Middle East, many media outlets in the Middle East had picked up the story and republished it. The caller
remarked that this was one of the few times they had been able to forward a
positive story from the United States that appealed to the press in the Middle
East.
In our effort to popularize the concepts we used, we started a new tradition. The tradition was to have an annual recognition award for significant
distinguished contributors to the field of riba-free Islamic banking in the
world. We awarded every ‘‘who’s who’’ leader in the field, and we tied the
award dinner to an annual seminar on Islamic Banking. This effort ran for
12 years. The event was designed to be graceful, but full of subliminal notions that underlined our American affiliation and our respect for the United
States political system and its laws. For example, we invited color guards to
start our events. We were the first Islamic organization in the history of
American Muslims to start its events not only with an invocation and recitation from the Holy Qur’aan but also with the national anthem, sung by a
professional singer and later by a wonderful young lady from the community. We invited our congressmen, state representatives, mayors, and many
other public figures to the dinner. The awards that were handed out were
not only awards from LARIBA but also included Certificates of Commendation from the Congress of the United States, the California State Assembly,
the Los Angeles Board of Supervisors, and the Mayor of Pasadena, California (a city 20 miles northeast of Los Angeles, where our LARIBA offices are
located).
We also did something very bold in the year 2000. After the currency
crisis of Southeast Asia, Malaysia, under the leadership of Dr. Mahathir
Muhammad, was the only country in the region that weathered the storm
and was able to contain the problem without sacrificing its foreign currency
reserves or resorting to heavy borrowing from the IMF. The Board of


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LARIBA decided to create a new award called the Life Time Achievement
Award, and we gave it to then-Prime Minister of Malaysia Dr. Mahathir

Muhammad. Dr. Mahathir came to Chicago to receive his award. We at
LARIBA also did something unique for the ceremony. Instead of holding
the function at a local hotel, we held it in a Chicago suburb, in the auditorium of a prominent and well-appointed Islamic Center built by American
Muslims who emigrated from Bosnia. This move gave LARIBA wide coverage in the community and in the world press, as well as good political and
operating credibility.
LARIBA had very humble means and it lacked enough capital. We used
to finance a home once every two to three months (the terms of financing
were onerous: 40 percent down and a seven-year term) and a car every
month, because we had a tough time convincing our friends to invest in the
company. The U.S. regulations regarding solicitation of funds are strict and
in general do not allow solicitation unless an offering is registered with the
government. The process of registering for a public offering with the United
States Securities and Exchange Commission (SEC) is lengthy and very expensive. However, we persevered, and our patience paid off. The community learned more about us, and the volume of calls started to increase.
However, we could not meet all that growing demand.
In the year 2000, we received an e-mail from a banker who used to
work for Freddie Mac to obtain information about LARIBA. We explained
to him what we do. In response, he introduced us to an executive at Freddie
Mac who was interested in growing its mortgage finance activities among
minorities in America. We talked, and he loved what we were doing. A delegation from Freddie Mac came to evaluate the company and its operations.
We explained to them that for every home we finance, we and the customer
each have to come up with three rent estimates for a similar home in the
same neighborhood to evaluate the rate of return on investing in the house
as if it were a commercial venture by using the market measured rental rate
to ascertain the economic prudence of the investment. We explained that we
do this because our faith prohibits us from renting money at a price called
an interest rate, but allows us to rent a tangible and rentable asset like a car,
a home, or a business. If the investment (not the lending) makes economic
sense, we finance the house mortgage; if not, we do not finance. The analyst
in the team was apprehensive; he asked if they could review some of the
financing files. They were all impressed when they audited the files.

Freddie Mac gave us approval in less than six weeks (they put out a
press release about it on March 26, 2001). This was a record for approval
time by Freddie Mac, which usually took an average six months under normal circumstances. We then were confronted with the issue of the format of
the operating relationship and how to do business with them without